British Air cuts ties with USAir 3-year relationship soured amid suit over linkup with American


British Airways, which is seeking an extensive alliance with American Airlines, said yesterday that it was severing its three-year relationship with USAir and selling its $400 million stake in the Arlington, Va.-based carrier.

"It has become inevitable," British Airways Chief Executive Officer Bob Ayling said. "It would clearly be unwise to pursue an alliance with an unwilling partner."

USAir, which had sued British Air over its proposed alliance with American, welcomed the move.

"This is an important first step that USAir has been seeking in order for it to become an effective independent competitor at London's Heathrow Airport," USAir said following British Airways' announcement.

In its suit, USAir had accused the British carrier of violating the terms of its alliance with USAir and alleged that the BA-American alliance violates U.S. antitrust law. It said yesterday it would "vigorously" pursue the suit, which is pending in federal court in New York.

Hoping to build its trans-Atlantic service, USAir has said the breakup was necessary for USAir to resume service to London that it gave up when it became British Airways' partner. It has asked the U.S. Department of Transportation for permission to fly to London from Charlotte, Boston, Pittsburgh and Philadelphia.

Both USAir and other airlines insist that more landing slots at Heathrow are necessary for all U.S. airlines if the American-BA deal is to be approved by federal regulatory agencies. Currently, only United and American are allowed to land there. Although the partnership between British Airways and USAir will be dissolved, passengers holding tickets on the two carriers will fly as usual. The breakup is not expected to affect British Airways' daily flight to London at Baltimore-Washington International Airport, at least in the immediate future.

USAir has an option to repurchase British Airways shares in the next 60 days. British Airways yesterday declined to reveal the price it had offered to USAir but its almost one-quarter share of the airline is now worth about $425 million, more than double the amount recorded on its books.

And USAir would not comment on whether it would buy back the shares. If it doesn't, BA will sell the shares in a series of private transactions or in an underwritten public offering. It can't sell a stake larger than 5 percent to any single investor. USAir's common shares are now nearly double their low price of last year. They rose 12.5 cents yesterday to $22.625.

As part of its agreement with BA three years ago, USAir was required to give its Baltimore-London route to British Airways. The service is the only year-round daily service from BWI to Europe.

"The fact that they're terminating their relationship [with USAir] really doesn't affect our London gateway," said Jay Hierholzer, associate administrator for marketing and development at BWI.

The alliance has not been nearly so important to BWI as to other airports, he said. Since USAir and BA teamed up, USAir has funneled a significant number of passengers from numerous cities into Pittsburgh and Philadelphia to connect with British Airways' flights to London. In contrast, most of the passengers on British Airways' 218-seat Boeing 767 originate in the Baltimore area.

One industry observer suggested yesterday that BA would ultimately reassess whether it needs the Baltimore service, particularly with two daily flights operating during the peak season from Washington-Dulles International Airport. "There's no real incentive for BA to keep that route," said Jeffrey Miller, an Ellicott City-based attorney who represents the travel industry.

The breakup ends an alliance that began in 1993, when British Airways invested $400 million in the U.S. airline in return for a 24.9 percent stake and the opportunity to hook its trans-Atlantic service into USAir's extensive East Coast market. Some analysts suggested yesterday that, with British Airways no longer in the picture, USAir might be a more desirable acquisition for a larger carrier like United, if it can cut its high costs.

With USAir still losing huge amounts of money, the investment by BA was seen as critical to USAir's survival. At the time, the British carrier promised to invest another $450 million in USAir by 1998, provided the U.S. government agreed to permit foreign companies to own greater shares of U.S. airlines' voting stock. But the alliance gradually deteriorated. Two years ago, British Airways said it would withhold further investments until USAir's financial performance improved. And in June, it announced its agreement with Dallas-based American to coordinate passenger and cargo activities and establish reciprocity in their frequent-flyer programs.

That alliance would create almost 36,000 potential city pairings worldwide. USAir and other major airlines complain that it would give British Airways and American a monopoly on service to Europe.

Pub Date: 12/19/96

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